The Government told the Defence Force in 2010 to reduce costs so money could be redistributed within the military. The civilianisation project was one of several the defence force initiated in response.

But Auditor-General Lyn Provost said today it had achieved only "limited success".

"It will not achieve the NZDF's target of converting 1400 military positions and saving $20.5 milion a year by 2014/15.

"Instead, 600 military positions will be converted and we estimate savings of $14.2m a year by 2014/15. In addition a drop in morale and increase in staff attrition has led to reduced NZDF capability."

Her report was critical on numerous fronts - including the fact it told the Government it would convert 1400 military positions into civilian jobs without knowing how many military positions it would need from 2015.

After an investigation NZDF discovered that while some ranks and trades had surplus military staff, it was going to need more military staff overall.

"NZDF should have found out how many and what kind of military staff it would need before telling the Government that it would convert 1400 military positions into civilian positions," Provost said.

Despite the above, NZDF was standing by its commitment to the Government that it would achieve $350-$400m in total savings. But in the meantime it had lost far more military staff than intended.

"The loss of so many military staff (which can be attributed in part to the civilianisation project), has made it more difficult for NZDF to do its job," Provost said.

"Converting 1400 military positions into civilian positions would always be difficult. Discharging military staff has to be carried out with great care to avoid damaging the bonds of camaraderie, integrity and commitment that are part of NZDF culture.

"Instead, NZDF chose a course that led to a drop in morale and an increase in attrition resulting in reduced capability. NZDF now needs to recover from the damage caused by the civilianisation project."

Provost was critical of the speed at which NZDF went about the savings and said it did not fully consider the project's potential impact on staff, or address the significant risks of the process.

"My staff saw much evidence in reviews and in briefings to Cabinet and the Minister of Defence that NZDF recognises that it made mistakes... NZDF has decided that further conversion of military positions to civilian positions will, in general, take place gradually, as staff leave particular positions. NZDF has a focus on rebuilding morale and restoring mutual trust with military staff.''

"The observations and conclusions made by the Auditor General mirror in large part what our own people had been telling us. When combined with some of the conditions of service changes being considered at the same time, many within the Defence Force felt that we had broken a social contract with them."

While the plan had been the civilianisation 1400 positions, only 303 military staff were discharged - 87 into civilian jobs and 218 were made redundant.

The impact on morale was the reason the programme was changed after the first phase, Jones said.

"To date the Defence Force's reforms have delivered nearly $160 million, which has been a massive undertaking. Civilianisation through attrition has continued, and we believe the financial targets we set ourselves when we started, will be met."

The civilianisation programme had a "detrimental affect" on the perception of the organisations culture, he said.

Efforts were now being made to rebuild morale, including with a pay increase in 2012.

"However, the reality of militaries throughout the world, such as the United Kingdom and the United States, is that down-sizing is a fact of life. Our Defence Force hadn't had to deal with that for a while, so it came as a shock."